Should the U.S. Worry About China’s Canal in Nicaragua?

Following an agreement between the Nicaraguan government and shadowy Chinese billionaire Wang Jing, there may be a new canal in the Western Hemisphere. The possibility of a transoceanic canal through Nicaragua has been discussed for almost 400 years. Nicaragua was almost the place for the U.S.-built canal until, for a number of reasons, Panama became more ...

Following an agreement between the Nicaraguan government and shadowy Chinese billionaire Wang Jing, there may be a new canal in the Western Hemisphere. The possibility of a transoceanic canal through Nicaragua has been discussed for almost 400 years. Nicaragua was almost the place for the U.S.-built canal until, for a number of reasons, Panama became more attractive. Wang Jing and Nicaraguan officials envision a competitor to the Panama Canal built for supertankers and cargo ships too large to pass through Panama, and insist that the megaproject would spur economic development by transforming Nicaragua into a global trade hub. Work on the project is already underway.

Still, some serious questions remain unanswered.

Plans for a Nicaraguan canal have been drawn up and scratched many times, but this latest attempt likely has the political and financial backing necessary to make it through to completion. President Daniel Ortega has made the canal a centerpiece of his legacy. Ortega, who recently made changes to Nicaragua’s constitution that will allow him to hold office for life, has the parliament in lockstep behind him. In a 2013 vote the parliament agreed to offer Wang Jing a 100-year concession to build and operate the canal. The vote went through without debate, public consultation, or feasibility/environmental impact studies. There is virtually zero chance of Daniel Ortega leaving office prior to the end of the project’s projected 5-year completion timeline.

Wang and his Cayman Island based firm, the Hong Kong Nicaragua Canal Development Investment Company (HKND), appear capable of providing the estimated $50 billion project cost. Wang, who rapidly rose to wealth after working for a government telecom company that went private in 2009, has indicated that he’s already found outside investors to meet the canal’s massive price tag. He has yet to name any of these investors, and there is speculation that the Chinese government is underwriting the project. Like many of China’s leading tycoons, Wang Jing has close ties to the Chinese political apparatus, and has promised that Chinese firms will take the lead on construction. Wherever it is that the money is coming from, it appears that finance will not be a concern.

The project has met resistance due concerns around national sovereignty, ecological impact, and social disruption. The concession signed by President Ortega gives HKND broad authority over land tapped for use in the project, and will result in forced relocations of an estimated 100,000 Nicaraguan citizens. The environmental repercussions, even if the project is managed to the highest standards, will be severe. The canal will cut across Lake Nicaragua — the largest fresh water body in Central America and a pristine ecological site — and dredging could transform the lake into a “dead zone.” When construction began last December, clashes between police and protestors led to dozens of injuries, including reports of two dead protestors. Nicaraguan policed denied these claims.

Ortega’s former vice president, Sergio Ramirez, is so concerned by the project that he drafted a manifesto (signed by many prominent Nicaraguans) accusing Ortega of violating national sovereignty for his own political and financial gain. Ramirez called the project a white elephant, and said that the project’s opaque nature has made it impossible to know “what kind of business deals or financial manipulations are hiding behind the curtain.” In return for their concession, Nicaragua will receive only $10 million annually for the first decade while controlling no ownership. Following the first decade of operation Nicaragua will be granted a 10 percent increase in ownership stake every 10 years.

The canal’s construction should be seen as a geostrategic probe by China. The depth of the canal, a reported 28 meters, should also raise eyebrows as it would be deep enough for Chinese submarines to quickly and covertly cross between the Pacific and Atlantic Oceans. While China has denied involvement in the project, the scale of construction and investment paired with Wang Jing’s opaque personal history and rapid rise to wealth, make this claim very dubious.

The other way that the canal might be stopped is progress on further expansion of the Panama Canal and the power of the free market. The Panama Canal is in the process of finishing a third set of locks by the end of 2016. There is also discussion of building a fourth set of locks. The Panama Canal leadership thinks that the construction timeline and the acceptable returns needed by the unnamed investors in Nicaragua (if they are private sector investors) will imply toll fees double that of the Panama Canal. If that is the case then the Nicaraguan canal will be uncompetitive. If the investors aren’t looking for a market return, however, than all bets are off.